Manufacturers plan strategies to stay afloat

WORLDWIDE: Plagued by production overcapacity, continued pressure on prices and subdued short-term demand prospects, the business environment for turbine makers is decidedly negative.

Companies are looking to newer markets such as Brazil

But manufacturers are fighting back by looking to make the most of their expertise in new areas as well as trying to cut costs where they can.

Worldwide turbine supply capacity is nearly double the demand, says Sean McLoughlin a clean technology analyst at HSBC Bank. "Next year, we are expecting an 8% decline in new installations globally, and it would be no surprise to see pricing remain under pressure," he says. "We'll have this dip in 2013, and it's all about how companies will face up to this dip and get through it."

Indeed, opportunities in many of the world's largest wind markets are narrowing. While 2012 should be a strong year for the US wind industry, market players widely expect new installations to drop significantly in 2013. Even if the production tax credit — due to expire at the end of this year — is extended, the general perception is that it is already too late to save next year's installation figures. Europe has seen the pace of growth slow down, with reduced support for renewable energy amid financing difficulties in many countries. The Chinese market, primarily the domain of domestic manufacturers, has also cooled off considerably — which has led China's turbine makers to seek a greater foothold internationally.

Against this background, it is not surprising that companies are moving to cut costs. Market leader Vestas has been the most vocal about its efforts, which include factory closures, the merging of production units, centralising administrative functions and between 2,300 and 3,900 layoffs this year.

One way Vestas is seeking to reduce fixed costs is its agreement in June to sell its tower factory in Varde, Denmark, to Chinese firm Titan Wind Energy, a long-standing supplier and business partner. According to the terms of the deal, to be finalised in September, Titan will continue to supply Vestas with towers.

Emerging competition

A bright spot is offered by emerging markets in Latin America and Eastern Europe, and many companies have increased their presence in countries with the strongest prospects. Yet this is a strategy being pursued across the board, so competition in some emerging markets is quite keen. "European and American turbine manufacturers have strengthened their efforts in emerging markets to compensate for losses in Europe," says Birger Madsen, director of BTM Consult, "but Chinese manufacturers are doing the same."

Chinese wind companies have only just recently begun to make inroads into foreign markets so competition could be more of a threat in the longer term. Yet, some analysts believe that Chinese manufacturers are already forcing down prices in some countries outside their home market.

Market players agree Chinese wind companies are destined to play a bigger role internationally in the future. "Chinese manufacturers are backed by Chinese banks," says Eduard Sala de Vedruna, a senior analyst at IHS Emerging Energy Research. "And they are picking markets, like eastern Europe, where financing is not readily available."

At the same time, consolidation is expected in China's crowded wind sector, with some market players disappearing from the scene in coming years. "China is in a situation where there are too many companies and not-yet-good-enough wind turbines," says Madsen.

And there is also likely to be consolidation on a global scale. "The decline in global demand will intensify margin pressures for the already-struggling wind original equipment manufacturers," HSBC Bank wrote in a recent report, noting that this could trigger industry rationalisation through the closure of older facilities and consolidation among second and third-tier market players.

Flexibility and outsourcing

For both Chinese and western manufacturers seeking to expand in new markets, flexibility is increasingly expected to be the watchword. One reason is that some fast-growing markets that are providing short-term solace to the market may have limited potential in the long term. "The days are over when you can go to a large wind market, install everything you want and develop this market for a very long time," says Sala de Vedruna. "Manufacturers are picking markets in many different places and companies are looking for more flexibility."

There are many ways to introduce greater flexibility into the industry. Acciona Windpower announced in April that it was building a mobile factory in Brazil to make concrete towers for a wind project in the state of Rio Grande do Sul. In theory, Acciona could pack up the factory and use it in another location in the future.

Outsourcing is another option to increase flexibility. When manufacturers expanded production capacity from Europe to large markets like the US, it might have made sense to replicate an integrated approach in which they retained tight control over many critical parts of their turbines in these new outposts, says Sala de Vedruna. "This strategy is costly, though, if you want to move rapidly, and in an economic way, into some of these new markets," he adds.

Gamesa was one of the first companies to announce that it was moving away from this integrated approach and use outsourcing on a case-for-case basis, he says. In India, for example, Gamesa is outsourcing blades to LM Wind Power in one part of the country, while making their own in another part.

Outsourcing is not only a strategy pursued to aid international expansion, but may also be key in bringing down wind energy costs. Economic difficulties that have resulted in incentive cuts in some markets have further increased the importance of industry efforts to make wind fully competitive with traditional energy sources. "To meet the challenge of coming down on price, I see original equipment manufacturers forging a closer and more committed partnership with their sub-suppliers," says Madsen, "both in terms of research and development and in production. The trend is already under way, but I think it will be accelerated."

At the recent European Wind Energy Association conference in Denmark, Siemens Wind Power CEO Felix Ferlemann stressed the importance of innovation and industrialisation to bring down costs. "We need to increase the efficiency and reduce the complexity of our products. And we need to consequently industrialise our sector," he said. Taking a cue from the motor industry, the former head of the chassis division at Benteler Automotive pointed to the need for clear platform strategies for products, modularisation and standardisation.

Service supply

Once considered to be a side business by most turbine makers, operations and maintenance (O&M) is now a sector in which manufacturers are actively seeking to grow. The market is contributing to this trend, as clients and banks financing wind farms are increasingly seeking comprehensive service packages.

Vestas notes that it has increasingly channelled investments towards less capital-intensive and more profitable areas such as its services business — a strategy it is pursing not only to expand the business but to make it less volatile to rapidly changing market conditions. In June, the company signed its largest-ever service renewal contract, a 1.9GW, seven-year deal covering 1,100 turbines with Portuguese renewable firm EDP Renovaveis.

Personnel boost

Staffing figures from Spain's Gamesa show that maintenance can provide a buffer in difficult economic times. In 2011, the group's global head count rose from 7,262 to 8,357 as the company shifted to an increased focus on operations-and-maintenance and research-and-development jobs. However, Gamesa's tightening of existing rationalisation measures, following a €21-million net loss in the first quarter of 2012, could put a brake on further head-count gains.

"Focusing more on O&M isn't an anti-crisis strategy per se," says Sala de Vedruna. "But you can say that because of the more difficult market conditions, manufacturers look at operations and maintenance as an interesting business offering low but more stable margins and recurring revenues."

Partnerships can be a good way to spread both the costs and risks of investments, including those for research and development, particularly when money is tight. In offshore wind, where both investment and risks are much greater than onshore, partnerships may be crucial. While Siemens is the offshore turbine market leader by a wide margin, other manufacturers are angling to increase or stake out market share.

Offshore partners

"In offshore there are newcomers like Areva and Alstom that have balance-sheet backing and can afford the next generation of multi-megawatt turbines," says McLoughlin. "But on the other hand there are the smaller, independent manufacturers that have been very vocal on the need for partnerships." Vestas has said that it may bring in partners to help develop its next generation offshore turbine. Germany's Nordex recently announced it was abandoning its offshore business after it failed to find a joint-venture partner.

"Whether or not to be in the offshore business is an important strategic decision that every company needs to make," says McLoughlin. "Clearly there's a big growth opportunity, so a company must ask itself whether the incremental growth expected in five years' time or so is worth an investment today."

"Offshore represents a significant challenge," adds Madsen, "because it has turned out to be a lot more expensive than was expected ten years ago." Madsen notes that the industry is looking for oil and gas majors to create alliances and help provide the needed funding.

Partnerships are also seen as being of key strategic importance in China, the world's largest wind market, particularly now that this market is slowing down and non-Chinese manufacturers continue to face difficulties gaining market share. Many foreign turbine makers are reviewing their strategy for the country, which is nonetheless seen as an important market in which to have a presence. "Basically, China is seen as a market for the Chinese," says Sala De Vedruna, "so there are all these movements to try and find a partner."

Indian manufacturer Suzlon seemed to share these sentiments when it announced the sale of Suzlon Energy Tianjin, its Chinese manufacturing subsidy in June. "Looking ahead, we will approach (the Chinese) market by combining development with an innovative partnership model," Suzlon group chairman Tulsi Tanti said at the time. The company said it was adjusting its strategy in the Chinese market "with an agile, asset-light business model to achieve high growth and margins but with lower investments".

Forming partnerships in China may not always be so straightforward, however. Also in June, Nordex chief executive Juergen Zeschky said that it was continuing to pursue the formation of a joint venture in China but could not make a reliable forecast about its chance for success. Meanwhile, Vestas has closed one of its three factories in the country and merged its Asia-Pacific and China divisions in another move to cut costs.

Alliance call

While manufacturers may not have that much influence on policy frameworks, a reasonably stable regulatory backdrop is essential for the development of wind energy. So as they plot strategies to remain competitive in a difficult market, some manufacturers are also targeting policymakers.

Indeed, Siemens' Ferlemann believes the key threat to the industry is the regulatory uncertainty arising from the financial crisis and austerity measures. To overcome that uncertainty, he has called for the creation of an alliance between the wind industry and policymakers in Europe.

"In this alliance, wind industry leaders should commit to a clear timeline when wind energy will become competitive with traditional energy sources," said Ferlemann. "In return, policymakers should support the establishment of regulatory frameworks that encourage further investments in wind energy in the upcoming years."

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